Stock rally harbors risks: Financial expert warns of limited scope of price gains and overvaluation of tech companies

Stock rally harbors risks: Financial expert warns of limited scope of price gains and overvaluation of tech companies

Stock markets have enjoyed a remarkable rally recently, but experts warn of a possible Icarus effect. According to Tilmann Galler, capital market strategist at JP Morgan Asset Management, there are some specific features of the current stock rally that urge caution. In particular, he points out that only a few companies are responsible for the rise in the S&P 500 and that the positive development is mainly due to valuation expansion. The above-average valuation of some technology stocks is particularly pronounced. Galler explains that in recent months the markets have priced in declining inflation risks and a more moderate central bank policy in the future, but the risks may have moved a little too far into the background.

However, the current stock rally could soon reach its limits. The prospect of falling interest rates poses risks as current expectations for corporate earnings growth appear optimistic. Historically, the last three recessions resulted in significant declines in corporate profits. In addition, the valuation of some technology stocks has increased by over 25 percent, which means that the price-earnings ratio (P/E) of the IT sector is once again one standard deviation above the 20-year average. The euphoria over progress in the development of artificial intelligence and low debt have boosted the prices of tech companies. But the question remains whether this development is sustainable.

Another risk for the stock markets is the ongoing tensions in the banking system, which have led to a tightening of credit conditions. This is already having an impact on demand for loans and investment activity. The current purchasing managers' indices are already showing a slump in incoming orders in the USA and Europe. The impact on highly valued technology companies remains to be seen.

JP Morgan Asset Management's assessments illustrate the potential risks on the stock market. Investors should therefore pursue a defensive investment strategy with a focus on quality and cash flows to counteract possible setbacks and avoid a possible Icarus effect on the markets.

According to a report by www.boerse-online.de,